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Prior Permission from RBI for Acquisition/ Transfer of Control in NBFC

Varun Hariharan

| Updated: Jun 03, 2020 | Category: NBFC

Transfer control in NBFC

Overview of Transfer of Control in an NBFC

A Non-Banking Financial Company also known as an NBFC is a company that is registered under the Companies Act 2013 or previous company law 1956. An NBFC is engaged in the business of loans, advances, shares, securities, hire purchase and leasing activities. The above categories are the principal business of an NBFC. Under no circumstance can an NBFC take part in the business of conducting agricultural activities,  industrial activity, purchase or sale of any goods (other than securities), or providing any services and sale and construction of immovable property. Apart from this, one of the main business what an NBFC concentrates on is accepting and receiving deposits.

For incorporating an NBFC, the promoters have to form a company. Some of the documents which are required for forming a company include the memorandum of association and the articles of association. The articles of association contain all the rules and bye-laws related to the company. The ownership structure and percentage of ownership would also be present in the articles of association of the company. Prior approval would be required from the Registrar of Companies (ROC) in case there is a change in the ownership or transfer of control in the company. Before seeking approval from the ROC, the shareholders of the company would require to hold a general meeting.

In the same circumstance, an NBFC also would require prior approval in case of an acquisition or transfer of control in the structure of the NBFC. The main regulatory authority for NBFCs is the Reserve Bank of India (RBI). The RBI brings out various notifications and circulars related to the operation of NBFCs in India. One such notification is the permission required from the RBI for acquisition or transfer of control in an NBFC.

Regulatory Norms under the 2014 circular for Acquisition/ Transfer of Control in an NBFC

The RBI brought out a circular in 2013-14 DNBS (PD) CC.No.376/03.10.001/2013-14 related to the acquisition and transfer of control of ownership in an NBFC. Before changing the control in an NBFC, prior permission is required from the RBI. Section 45 IA(4)(c)[1] of the Reserve Bank of India Act (RBI Act)  states that a certificate of registration can only be granted to the company on the condition that the character of the new promoters will not affect the status of the public or the interest of the depositors.

Before this circular, the RBI issued a circular in 2009 related to the acquisition and transfer of control in an NBFC. This circular was related to permission in case of transfer of control for an NBFC which accepts deposits. The 2013 -14 circular looks into the management of the NBFC.

Under the 2014 circular prior permission was required for the following:

  • Where there is any form of takeover or acquisition by an NBFC. The acquisition has to be a change in control related to the shares of the NBFC.
  • Where there is a merger or divestment or amalgamation of one NBFC with another NBFC. This would be applicable where another NBFC is acquiring the target NBFC.
  • Where there is a merger or divestment or amalgamation of the NBFC, if the transfer of ownership of shares in the NBFC is more than 10%. This would be 10% of the paid-up capital of the NBFC.
  • Approval would also be required from the RBI before approaching the court for an order for amalgamation or merger under the companies act.

In case an NBFC has any form of acquisition or transfer of control, then compliance must be followed by the NBFC under Sections 45K and 45L of the RBI Act, 1934. Violation of these regulatory provisions would lead to strict penalties under the respective acts.

Regulatory Norms under the 2015-16 circular for Acquisition/ Transfer of Control in an NBFC

The RBI brought out a circular in 2015-16 to replace the 2014 circular on acquisition and transfer of control for an NBFC. The RBI has reviewed the previous directions on Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions, 2014. In a review, the RBI decided the operation of acquisition and transfer of control in an NBFC based on recommendations based on the draft circular in March 2015. While certain recommendations were similar to the previous circular the RBI made several changes.

The following recommendations were brought out by the RBI:

  • The RBI stressed the requirement of written permission from the NBFC if there is any form of acquisition or transfer of control in an NBFC.
  • Written permission is required for any acquisition, change, or transfer of control in the NBFC. The permission would be required from the RBI irrespective of whether there is a change or not in the management of the NBFC.
  • Changes in shareholding in the NBFC would also be applicable for any change in control. If the shareholding pattern changes over the period, then prior permission is required from the RBI. Change of shareholding of 26% or more would require prior approval from the RBI. However, prior permission or approval would not be required if the change of shareholding is going more than 26% due to any form of buyback of shares from the shareholders or where there is a proper capital reduction procedure by a competent company court. No prior permission is required by the RBI however, this has to be reported within one month of occurrence.
  • Change in the directors would also require prior approval from the RBI. If the change is more than 30% (which includes independent directors) then such change would require prior permission from the RBI. No approval would be required where directors are re-elected on retirement by rotation.

Apart from the above compliances, the NBFC has to continuously report the changes in the shareholders and management to the RBI. This would also be mandatory under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.

Other regulations such as the Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit Accepting Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 would require NBFCs to disclose any form of change of ownership.

Procedure for Prior Permission from the RBI related to Acquisition/ Transfer of Control

The following procedure has to be followed by an NBFC for making an application for change in control:

  • The NBFC has to make an application on the letterhead of the company for obtaining prior approval from the RBI for NBFC takeover. While making the application, the NBFC must quote the above changes of control in the NBFC.
  • The following documents have to be submitted by the NBFC in the application:
    • Information related to proposed directors or shareholders in the company. This will include details of key management executives of the company.
    • Information related to the source of funds in the NBFC. This document also has to mention where the funds have come from.
    • A declaration has to be submitted by the proposed directors/ shareholders that they aren’t associated with any unincorporated entity or entity that accepts deposits from the public.
    • A declaration also has to be provided by the directors and shareholders that they do not have any form of association with any company.
    • The directors also have to declare, that they are not adjudged insolvent or there are no bankruptcy proceedings against them.
    • The directors also have to declare that there is no criminal case against them under any law in India. Criminal cases would also include, cheque bouncing cases under Section 138 of the negotiable instruments act.
    • The banker also has to submit a report on the directors/ shareholders.
  • Applications must be submitted to the regional office of the department of non-banking supervision where the NBFC has its main registered office.

Requirement of Public Notice for Acquisition of Shares

If there is any form of Acquisition of shares or change of control in the NBFC, an application must be made to the RBI regarding the same. Apart from this prior public notice is required to be given by the NBFC.

The following considerations have to be taken by an NBFC giving prior public notice:

  • Prior public notice must be provided by the NBFC. Public notice would only be provided if there is any sale or transfer of ownership by sale of shares in the NBFC, or if there is a major transfer of control which affects the NBFC. Transfer of control can happen with or without the sale of shares in an NBFC. The public notice has to be provided by the management of the NBFC. Apart from this, parties that are connected with the transaction also require to provide prior public notice. This would include associated parties of the NBFC. The parties who want to issue prior public notice must take consent of the RBI.
  • The public notice must contain the intention of the seller. Apart from this, the public notice must contain the nature of the transaction; the market strategies that made the management take such a decision, and reasons for change in ownership and control of the NBFC. The notice must be published in one leading national newspaper and one local newspaper, where the company has its registered office situated.

The 2015 directions have evolved from the previous direction.  These provisions would only apply in circumstances such as change of control of the NBFC, change in ownership pattern of the NBFC, and shareholding pattern of the NBFC. These directions would also be applicable if the NBFC is selling some of its shares and it is been acquired by another NBFC. NBFCs have to strictly comply with the circulars issued by the RBI. Any form of violation in these circulars would lead to the cancellation of the Certificate of Registration of the Company.

Post-Public Notice Procedure

When the notice period expires for the company, the company has to convene another board meeting to make a resolution. One of the main agendas in the resolution would be to appoint new directors and shareholders for the NBFC.

After passing the board resolution, the company has to file Form- DIR 12[2] with the registrar of companies within 30 days of the resolution. The company also has to comply with the procedures related to share transfer. After this, the valuation procedure has to be conducted by an external advisor for change in the share value. Respective stamp duties have to be paid on the shares.

RBI Notification

Once this procedure is successful, the NBFC would have to provide an official intimation to the RBI with documents such as Registrar of Companies Forms, Form DIR 12, Board Resolutions, and resolutions related to transfer of shares of the company.

Conclusion – Prior Permission on Transfer of Control in NBFC

The companies act requires companies to take prior permission from the Registrar of companies if there is any form of change or transfer of control in the company. After taking the necessary permission, the company is allowed to implement these changes. Similarly, prior approval or permission is required from the RBI for any form of acquisition or transfer of control in an NBFC. The NBFC has to follow compliance related to the amount of share ownership change, change in the shareholders or directors of the company. After securing approval from the RBI, the NBFC has to provide public notice of the change of control. Non-compliance with the above provisions related to change of control will attract severe penalties such as cancellation of the Certificate of Registration of the NBFC.

Also, read: RBI Requirements in Case of NBFC Takeover

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Varun Hariharan

Varun Hariharan has completed the Legal Practice Course from BPP Law School, Manchester. He has a Masters in Commercial and Corporate Law from the Queen Mary University of London and LLB Honours from Bangor University, UK. He specialises in law related to corporate, artificial intelligence and technology law.

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